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SAN FRANCISCO — Thousands of illegal immigrants won a step toward legal residency Tuesday when an appeals court reinstated a lawsuit contending that an illegal Immigration and Naturalization Service policy barred their applications for legal status.

The case involves the Immigration Reform and Control Act of 1986 that made illegal immigrants eligible for amnesty, and legal residency, if they had lived in the United States since the start of 1981 without committing a serious crime. They were required to apply by May 1988 and some 2.7 million illegal immigrants were awarded residency, the first step toward U.S. citizenship.

But an estimated 200,000 applicants were denied.

The INS first interpreted the law to bar amnesty for anyone who had left the United States for even a brief period since 1981. Numerous amnesty applicants were turned away, and many others said they were discouraged from applying before the policy was ruled illegal in 1988 and replaced with one that allowed brief departures.

On Tuesday, the 9th U.S. Circuit Court of Appeals reversed its own 1999 decision, in which it ruled that illegal immigrants who claimed they were prevented from seeking legal status in 1987-88 missed the deadline to file their legal challenge. An 11-judge panel of the circuit ruled 7-4 that a Sacramento federal judge should hear the class-action suit because the filing deadline did not expire.

“This is a big decision. This case has been going on for 14 years,” said Robert B. Jobe, an attorney with Immigration Lawyers Association in San Francisco.

Russell Bergeron, an INS spokesman in Washington, said the agency declined to comment until it reviewed the 43-page decision.

The case returns to U.S. District Court Judge Lawrence K. Karlton in Sacramento. No hearing has been set.

Karlton had ordered the INS to give immigrants affected by its policy another chance to apply for amnesty. Hundreds of thousands applied, but the government won an appellate order excusing the INS from considering the applications while it appealed to the circuit court.

Even with Tuesday’s decision, however, much legal maneuvering remains.

Illegal immigrants, who filed the proper paperwork on time but were denied amnesty because they had left the country, will likely prevail, advocates said. The INS said Tuesday that it did not know how many immigrants fell into that category.

But the immigration fate of untold thousands more is in question.

Immigrants were turned way by the INS because they had exited the country, and they left INS offices without filing an application. Thousands more, according to the suit, were discouraged from seeking amnesty at an INS office because they knew they would be turned away.

These two categories of immigrants must persuade Karlton to overturn a different 1986 federal law narrowing their litigation rights. Under that law, immigrants who did not file the INS application were barred from suing for amnesty even though the INS policy to exclude those who left the country was illegal.

The case is Catholic Social Services vs. Immigration and Naturalization Service, 98-16269.